The article explores the innovative use of KPI-based token emission in Web3 ecosystems, highlighting a shift from traditional, fixed emission vesting schedules to adaptive, KPI-driven systems. This approach not only ensures a more sustainable and responsive distribution of tokens in fluctuating market conditions but also introduces additional incentives. By aligning token release with specific KPIs, it effectively controls emission and motivates system agents to achieve these targets, thereby fostering a more balanced and efficient economy. In this article, we will also look at how Gotbit applied this innovative approach to the KIX project with advanced DeFi mechanics and what the results of the innovation were.
Traditional linear-based emission models, set before a project’s launch, outline a token distribution schedule for years ahead. This approach often proves suboptimal, as predicting the optimal rate of emission over such an extended period is challenging. This can lead to issues like overinflation or a lack of incentives within a protocol, as the predetermined emission fails to align with the evolving economic realities and needs of the ecosystem.
An example of a project failed with linear-based vesting schedule is well-known STEPN. At its peak in May 2022, STEPN accounted for nearly 20% of Solana’s paid users and was one of the most successful gaming projects in the crypto industry. After peaking, there was a rapid decline. The number of daily users of STEPN dropped by almost 80%. GST token price pulled off 99.6% of ATH in a few months. The decline in the number of new users affected both the decline in primary sales and the volume of resales in the secondary market.
Declining demand is not the only problem for STEPN. The flipside is the continued growth of supply. Without a limit to total supply, token inflation is no longer balanced by demand and has led to unprecedented sell pressure.
This issue underscores the need for a more adaptable approach like KPI-based emission, which can respond in real-time to the ecosystem’s evolving needs, limiting supply in periods of decreased demand.
Algorand’s introduction of a non-linear vesting schedule has led to a reevaluation of its rewards policy. The Algorand Foundation’s EIP-11252019AF proposal outlined a vesting schedule that accelerates during times of price increases and ensures a base rate of vesting in less favorable market conditions. This proposal has garnered considerable backing and has been approved by the community.
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The $CLIP token emission mechanism is based on TVL (Total Value Locked) milestones, deviating from the traditional methods of token issuance per block or time-based unlocking. The unlocking of CLIP tokens is tied to specific TVL milestones of the platform, such as an emission event when the protocol’s TVL reaches $20 million. To mitigate manipulation, the total TVL is calculated as a 30-day geometric mean of each user’s individual daily TVL, ensuring that short-term fluctuations do not disproportionately impact the platform’s TVL. Importantly, the value of CLIP tokens is excluded from the TVL calculation to prevent pump-and-dump schemes.
The circulating supply of $CLIP increases only when there’s a rise in TVL, marked by reaching new 30-day geometric mean TVL milestones.
Filecoin implements a unique dual-minting mechanism consisting of simple and baseline minting methods. Simple minting is allotted 30% of the total rewards, while baseline minting is assigned the remaining 70%, accounting for 55% of Filecoin’s overall 2 billion FIL supply. The baseline minting operates on a performance-based model tied to an escalating target for the network’s storage capacity. When the network’s actual storage exceeds this evolving baseline, the emission of rewards is limited.
This system is governed by a reward function that balances actual storage against targeted capacity goals, featuring a declining reward structure. As a result, rewards decrease over time, establishing a KPI-centric and reduction-oriented emission timeline. The comprehensive mathematics of this approach is elaborately explained in the documentation.
The GotBit team, through a collaborative effort with the team of a new fantasy sports project with advanced DeFi mechanics, has created a demand-changing dynamic $KIX issue.
The Dynamic Issuance Curve in the KIX Token System addresses challenges associated with traditional Issuance Curves, providing a mechanism for continuous operation during market fluctuations. By incorporating daily caps and periodic recalculations, the system aims to ensure stability and prevent potential risks.
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The Dynamic Issuance Curve is defined by a system of equations involving synthetic USDT and KIX tokens. The equations emphasize uniform liquidity across pools and a daily price revision relative to the AMM price. The solution involves recalculating the Issuance Curve price periodically, introducing a random variable.
As a result KIX project has said goodbye to time-based token emission overload flooding the market with unique mathematically-driven approach. Please review the latest update on the KIX’s official X account.
Implementing a KPI-driven emission strategy starts with establishing a set of metrics. These metrics are crucial for monitoring the effectiveness of the system in achieving its objectives. Take Automated Market Makers (AMMs) for instance; relevant metrics include Impermanent Loss, Trading Volume, Slippage, and Capital Efficiency. Additionally, certain metrics can be employed for external analysis. This involves examining factors like token prices and slippage on different exchanges.
Once metrics are implemented, it’s vital to evaluate them based on two key aspects: measurability and resistance to Sybil attacks.
Measurability implies that these metrics need to be consistently monitored over a period of time. This continuous tracking ensures that the metrics provide real-time insights and reflect the actual performance and engagement within the system.
When integrating KPIs into our token distribution mechanism, we must be wary of potential security threats. Choosing a metric such as Unique Active Wallets for reward distribution may expose us to Sybil Attacks, where an individual might create numerous fake accounts to inappropriately increase the rewards. The risk intensifies as we incorporate more KPIs, broadening the ‘attack surface’ for possible abuse. Hence, it is critical to implement a proactive defensive approach to foresee and protect against these weaknesses from the beginning.
Implementing KPI-based vesting demands a meticulous blend of on-chain and off-chain data. On-chain data is the most dependable for projects, yet extracting it from the blockchain poses challenges. Utilizing platforms like Dune or The Graph provides off-chain data, though the preference is for on-chain data. In this context, oracles such as Chainlink or Band Protocol prove to be valuable, offering a bridge to access the needed on-chain information.
Furthermore, conducting simulations to rigorously test the system prior to its actual deployment is crucial. This ensures that the system’s mathematical framework functions as intended in real-life scenarios. Stress testing can be carried out using tools such as cadCAD, radCAD, or Machinations.
The shift to KPI-based token emission in Web3 ecosystems represents a significant innovation over traditional token distribution methods. Unlike the fixed schedules of the past, this adaptive approach aligns token release with performance metrics, addressing the limitations of models with linear-based vesting. Examples from Algorand, Clip Finance, and Filecoin serve as proof that the ecosystem is successfully adapting to the new approach of KPI-based token emission. Key to this approach is the careful selection and monitoring of KPIs, ensuring data accuracy and security. This progressive method not only aligns incentives within the ecosystem but also promotes a more dynamic and efficient economic environment, showcasing the evolving nature of Web3 innovation.
